A bank's net interest margin (NIM) is the spread between the average yield on loans and deposits and the average cost for deposits and borrowings. With the Federal Reserve keeping its target range for the short-term federal funds rate in a range of zero to 0.25% since late 2008, the majority of banks have already seen most of the benefit they will realize on the cost side, while most continue to see their yields on earning assets decline.

Fig Partners analyst John Rodis says that "for most banks, there is just not much room for improvement on cost of funds," but the news isn't all bad.

"The one thing to remember when you talk about the margin is that even though the margin is down, it is just a ratio. It is very important to look at net interest dollars," Rodis says. "In a lot of cases, net interest income is coming down too, but it is certainly not coming down at the same pace as the margin."

FirstMerit Corp. (FMER) of Akron, Ohio, is an example of a bank with net interest income declining at a slower pace than the net interest margin. The company on Monday reported a fourth-quarter NIM of 3.58%, declining from 3.66% in the third quarter. Net interest income was $119.1 million in the fourth quarter, declining 1.3% from $120.7 million the previous quarter.

Still, Rodis on Wednesday downgraded FirstMerit to a "Market-Perform" rating from "Outperform," saying the stock was up 10% since it was upgraded in October. The analyst's target price for the shares is $16.00. Rodis lowered his 2013 earnings estimate for FirstMerit by five cents to $1.20 a share, to reflect "expectations for a lower margin and lower net interest income," although he also said he expected "core loan growth of 8-10% in 2013." Rodis also introduced a 2014 EPS estimate of $1.37.

Oppenheimer analyst Terry McEvoy on Tuesday stuck with his "Outperform" rating for FirstMerit, with an $18 price target, and said that "since it inked a deal to acquire MI-based Citizens Republic on September 13, 2012, FirstMerit's shares have fallen 10% compared to a 2% decline in the S&P Regional Bank index and a 4% gain in the S&P 500." McEvoy said that "in contrast to critics of the Citizens deal, we believe the assumptions behind the acquisition are conservative and that the combination will ultimately create a more valuable franchise."

Usage of this site is governed by TheStreet's Terms of Use available here.
Information collected on this site may be collected by TheStreet and SignOnSanDiego.
TheStreet's use of information collected on this site will be governed by TheStreet's
privacy policy available here. SignOnSanDiego's use of information collected on this
site will be governed by SignOnSanDiego's privacy policy available
here. If either
TheStreet's or SignOnSanDiego's privacy policy have provisions that are more restrictive
than the provisions of the other party's privacy policy, such more restrictive provisions
shall not apply to such other party.